Dabl at Home
Why Negotiating A Leaseback Eliminates Stress Caused By Selling Your Home
Negotiating a leaseback makes it easier for sellers to determine their next steps once their home has been sold, but it forces the homebuyer to take on significant risks.
For some homeowners, they’ll have the financial means to purchase a new house before their current residence sells. This will allow them to start moving into their new residence before their old one is even listed for sale if that’s what they find most convenient. But for many, they will need to rely on the profits from the sale of their current home in order to afford their next home, or will not be able to qualify for a new mortgage until their old house is at least listed for sale. In this scenario, most real estate agents advise homeowners not to start seriously house hunting until their current home is in escrow with all contingencies released.
You may now be wondering how moving will work if your old house is sold to new owners before you choose your new property and close escrow. Obviously, you need somewhere to go once the new owners take possession of the home. Some people will choose to temporarily stay with family or friends and put their belongings in storage for a while. Others will opt to sign a short-term lease with an apartment complex to give them time to look for the right property and close the deal. While this option doesn’t inconvenience any loved ones, it does necessitate having to move twice instead of the once. This is why the easiest option is to negotiate a leaseback into the deal when you sell your house.
A leaseback allows the sellers to stay in their old residence after the deal is done by renting it back from the new owners. This gives the seller time to find and prepare their new house to be move-in ready or secure a rental property. Alternatively, some sellers request a leaseback in order to allow children to finish the school year at their current school before moving. Since the deal is done, the sellers will have the profits from the sale of their home in the bank to invest in a new property. The homebuyers will be compensated with an agreed upon rental fee.
In order to negotiate a leaseback, the buyer and seller should sign paperwork that includes, among other things, the agreed upon rental price the seller will pay to the buyer, a security deposit paid by the seller to cover possible damages that may occur during the rental period, a clear determination of which party is paying for utilities and maintenance during the lease, and the length of the lease term.Your real estate agent will be able to help put together and coordinate any necessary paperwork. Similarly, companies like Homeward will give you a chance to buy before you sell your home. Homeward offers buyers cash to purchase a new home without charging interest, and then allows you to leaseback your old house from the company for a small usage fee until it’s sold. At that time, you will be able to get a new mortgage on the property you just bought and pay Homeward back for the purchase loan. The only real difference with using a service like Homeward is you are doing a leaseback from a company instead of a buyer, but the same principles still apply. That said, always read contracts carefully and do your own research before agreeing to work with a company like Homeward, as you may not be getting as good of a deal as the company would like you to think.
As you can see, leasebacks are extremely convenient for the seller. But if you are a homebuyer, be weary of agreeing to a leaseback. While saying yes may make your offer seem more appealing in a competitive real estate market, leasebacks definitely favor the seller. If you are willing to agree to a leaseback, the first thing you need to do as a buyer is check with your lender before signing a leaseback agreement. Your mortgage may only be approved if the home is an owner occupied property and not a rental unit. Some lenders will allow a leaseback of 30 days or 60 days, but others will forbid it.
Similarly, the homebuyers are responsible for paying their insurance and mortgage while the old owners remain on the property. The homebuyers will be liable for any damage caused by the former owners, and may need to acquire an additional insurance rider for the leaseback period. In addition, the homebuyers should clearly understand the seller’s motivation for staying in the home and be sure the seller will be ready to move out when the lease term ends. If the seller isn’t ready or proves to be difficult to work with, the homebuyers may face delays moving into their new home. If delays are severe, the homebuyers may need to pursue eviction, which is an expensive, stressful, and complicated process.
That said, a leaseback can still benefit homebuyers because it makes their offer more appealing and gives them more time to prepare for their own upcoming move. But since this decision does favor the seller, homebuyers must carefully consider how a leaseback will affect their own moving and housing plans, as well as if a leaseback will incur unreasonable expenses for the buyers. As always, seek professional advice from a real estate agent before using your best judgement to decide if you will agree to a seller’s request for a leaseback.